Delek US - Earnings Call - Q1 2017

Transcript

Speaker 0

Good afternoon. My name is Ty and I will be your conference operator today. At this time, I would like to welcome everyone to the DELAC U. S. Holdings Q1 twenty seventeen Earnings Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Mr. Johnson, you may begin your conference.

Speaker 1

Thank you, Ty. Good afternoon. I would like to thank everyone for joining us on today's conference call to discuss S. Holdings first quarter twenty seventeen results.

Joining me on today's call will be Uzi Dean, our Chairman, President and CEO Anci Ginsberg, CFO Danny Norris, CAO and other members of our management team. As a reminder, this conference call may contain forward looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release.

As a result, actual operations or results may differ materially from the results discussed in the forward looking statements. We undertake no obligation to publicly update any forward looking statements, whether as a result of new information, future events or otherwise. On today's call, Assi will begin with a few opening remarks on financial performance of the quarter. Danny will cover the financial details before turning it over to Uzi to offer a few closing strategic comments. With that, I'll turn the call over to Assi.

Speaker 2

Thank you, Keith. For the first quarter twenty seventeen, Delek U. S. Reported net income of $11,200,000 or $0.18 per diluted share compared to a net loss of $29,200,000 or $0.47 per basic share in the first quarter last year. We continue to make progress towards the acquisition of the remaining outstanding common stock of a loan that we do not already own in an all stock transaction.

We received a clearance from the FTC in early April, and we expect to close this transaction on July 1, subject to approval of both Alon and Delek shareholders. We ended the first quarter with approximately $591,000,000 of cash on a consolidated basis and $234,000,000 of net debt. Excluding debt at Delek Logistics, we had net cash of approximately $159,000,000 as of March 3137. Now I will turn it over to Denny to discuss additional financial details.

Speaker 3

Thank you, Assi. For the 2017, Delek U. S. Reported adjusted net income of 10,100,000 or $0.16 per diluted share compared to an adjusted net loss of $53,400,000 or $0.86 per basic share in the prior year period. A reconciliation of reported results to adjusted results is included in the financial tables of our press release.

The primary driver of the change on a year over year basis was improved performance in our Refining segment, which I will discuss in more detail in a few minutes. Our 47% investment in Elan USA resulted in a pretax income of $2,800,000 in the first quarter of this year compared to a loss of $17,800,000 in the prior year period. Our operating expenses declined by $7,800,000 compared to the 2016. This decline was driven primarily by reduced outside services and maintenance expenses. During the 2017, our Tyler Refinery underwent sixteen days of planned downtime and the majority of the costs associated with that work were capitalized.

General and administrative expenses decreased $2,500,000 on a year over year basis. This decline was primarily due to reduced outside services. Finally, our income tax rate, excluding the noncontrolling interest income associated with Delek Logistics of $4,100,000 was 30.9% in the first quarter of this year. Turning now to capital spending. Our capital expenditures during the period were approximately $15,200,000 compared to $6,500,000 in the 2016.

During the first quarter of this year, we spent $10,800,000 in our refining segment, dollars 2,800,000.0 in our logistics segment and $1,600,000 at a corporate level. Our 2017 capital expenditures are forecast to be $89,200,000 which compares to $46,300,000 in 2016. This amount includes $65,100,000 in our Refining segment, dollars 18,300,000.0 in our Logistics segment and $5,800,000 at the corporate level. This compares to our previous estimate of $80,700,000 Now I would like to discuss our results by segment. In our Refining segment, we reported a contribution margin of $64,400,000 compared to a contribution margin of $23,500,000 in the 2016.

Contribution margin in the 2017 included approximately $47,500,000 benefit from the RINs waiver and the first quarter twenty sixteen contribution margin included a $42,400,000 benefit from business interruption insurance proceeds. Both the RINs waiver and insurance proceeds benefited El Dorado. Improved market conditions positively affected the year over year performance. The Gulf Coast five-three-two crack spread increased to 10.5 per barrel for the first quarter of this year compared to $7.68 per barrel for the same period in 2016. Second, a declining RINs price environment had an indirect effect of improved netbacks across the wholesale system, and it also had a direct effect of lower RINs expense.

Third, there was an inventory benefit of $2,800,000 in the 2017 compared to a charge of $12,300,000 in the prior year period. Finally, the first quarter twenty seventeen included a net hedging loss of $800,000 compared to a $7,600,000 hedging loss in the prior year period. Operating expenses declined $7,500,000 on a year over year basis. We were able to achieve per barrel operating expense of $3.71 in the 2017 despite the planned downtime at Tyler compared to $4.12 per barrel in the 2016. Those benefits were partially offset by planned downtime at the Tyler refinery during the 2017.

Also, on a year over year basis, the 2016 benefited from a low crude oil price environment that improved residual product margins as compared to the first quarter of this year. During the 2017, the Tyler refinery had sixteen days of scheduled downtime for a turnaround. We expect that as a result of this work, the amount of time between turnarounds at the Tyler refinery can be extended into 2021 from our previous planned 2020 turnaround. The combined Contango and Midland Cushing differential benefit declined by approximately 1.19 per barrel on a year over year basis. This consists of the differential between Midland and Cushing that averaged $0.53 per barrel premium in the first quarter of this year compared to a premium of $0.14 per barrel in the prior year period.

Contango in the crude oil future market was $1 per barrel in the 2017 compared to contango of $1.8 per barrel in the prior year period. In March 2017, the El Dorado, Arkansas refinery received approval from the Environmental Protection Agency for a small refinery exemption from the requirements of the Renewable Fuel Standard for the 2016 calendar year. This waiver resulted in approximately $47,500,000 of RINs expense reduction in the first quarter, which amounts to $0.46 per share after tax. Now I would like to review our Logistics segment, which is comprised of the results from Delek Logistics Partners. Our Logistics segment contribution margin was $26,600,000 in the first quarter of this year compared to $26,800,000 in the first quarter of last year.

On a year over year basis, improved performance in the West Texas wholesale business partially offset lower performance from the Paline Pipeline and the Sala Gathering System. Now I will turn the call over to Uzi for his closing remarks.

Speaker 4

Thank you, Danny. Increased drilling activity in the Permian Basin began to benefit our operations in a number of ways late in the first quarter. In refining, the Midland to Cushing WTI differential moved to a discount as we entered the second quarter. In addition, increased crude oil production has improved gathering economics in our business. In logistics, the gross margin per barrel in West Texas increased and crude oil price differential support increased shipments on the Payline pipeline.

We expect our presence in the Permian Basin to increase upon a successful acquisition of Alon. We believe that we can create approximately $95,000,000 of annual pretax synergies and have the potential to unlock $78,000,000 of EBITDA from logistics assets that currently reside within our loan. This will create a Permian focused refining system with approximately 200,000 barrels per day of access on a combined basis and our logistics system is well positioned to support this larger operation. We ended the quarter with approximately $591,000,000 in cash and are well positioned to use this financial flexibility as we move forward with the next stage in our growth, while remaining focused on creating long term value for our shareholders. Before I turn the call over to Q and A, I want to welcome Kevin Kremke to the team.

He has been with us since early April and will become CFO on June 1. I also want to thank my dear friend and partner, Ginsberg for his contribution as CFO. And on June 1, Assi will transition from that position into a new role with the company in strategic planning or business development. Assi, you're not going anywhere. With that, Ty, will you open the call for questions?

Speaker 1

Kai, can we turn it over to Q and A?

Speaker 0

And we do have a question. Our first question comes from the line of Brad Heffern with RBC Capital.

Speaker 5

Hi, everyone. Hey, Uzi or maybe Assi, I'm not sure. I wonder if you could go into a little more detail on Eldorado getting the RFX exemption. Correct me if I'm wrong, but I think in the past that facility hasn't gotten one before. So I was wondering what changed this time around.

And I was also wondering it looked like the gain on RINs that you reported this quarter was actually more than the RIN expense you guys reported last year. So I was wondering if that exemption actually meant that your net you were net long RINs in 2016?

Speaker 4

Let me take it one by one. I think there are three questions here, Brad. I'll answer the first one, try to answer the second one, I'm sure Assi will answer the third one. So the first one, if Eldore regarded in the past, the short answer is yes, it did get in the past. It wasn't as meaningful.

And obviously, arenas at that time weren't $1 But to answer your question, yes, we did. The second question about the expenses, I'm not sure I understand what the question is, if you can clarify that question, and then I'll let Assi answer the third one.

Speaker 5

Yes. So I was just saying that I think that the gain that you guys reported this quarter, 46.5% or 47.5%. I think last year the rent expense that you guys reported was like $40,000,000 So I was wondering if getting this exemption meant that that basically that you had like a net gain on rents for last year.

Speaker 2

So first, I will say on the first question that was the answer. In the last two years, El Dorado did not had a waiver. I think the last time it was 2012 or 2012 probably, maybe 2013. So since the RIN is meaningful, we didn't have a waiver. Second, once we got the waiver, we had RINs on hand and we were long, but the value of those RINs went down.

So I'm not sure exactly when we reported the cost of RINs, that was what we reported was what we actually bought in the market. And that was what we paid for it in some cases, $0.08 0 to $0.90 to even $1 RIN. So those are two separate basically aspects when you look at it. But we do know is that the value of what we got was 47.5%.

Speaker 5

Okay. I'll take offline. It's kind of complex. I guess secondly, was curious on the Tyler margins this quarter. Typically, we don't see Tyler and Eldorado so close on realized margins.

Was that just the impact of the turnarounds? Or was there anything else going on there?

Speaker 4

Well, obviously, there's a lot of noise within with turnaround, building products, shipping products from The Gulf to supplement that you don't make money on that, then shutting it down, then restarting. Sometimes you don't get the right products for the next for the first few days. So a lot of noise. I wouldn't read much into it this quarter. That's the reason we were very specific on the sixteen days shutdown.

Speaker 5

Okay. Got it. And then finally, Assi, if you could just give your updated thoughts on or sorry, for Uzi, on Permian spreads. You talked in the past about how important you thought it was for production levels to get above the sort of take or pay agreements. Do you think we are versus that now?

What's the outlook?

Speaker 4

We are probably not far away from being breakeven. For a while, I thought that we were there. But now with the filling up of the North Dakota pipeline, which as you know, started the ETP pipeline that starts June 1, there's noise in the area. I believe that the Tecopei will exhaust themselves If they didn't already, it's happening any day and we'll go to transportation cost. We already saw Midland moving from plus 50 to a minus $1 Now it's a little less than that, it's minus 70 or 80, I think, I didn't look today.

But that's and we see the differential between Midland and LLS moving out, that's basically what we need to look at. Now the next leg obviously is how much of that production, including the Bakken production can be absorbed in the Gulf Coast refineries. And I don't know that you probably know, I said it in the past, you guys probably know that number better than I do. I don't know that number. But there will be a point that, that capacity will exhaust itself and then it needs to clear the export market.

And then we're talking about a completely different ballgame. So do I think that it's going to be do we think that it's going to be $5 maybe for short period of time? Do we think that $1 is sustainable? Probably not. The breakeven in our malls show 1.5 to $2 under long term differential.

Speaker 5

Okay. Thanks for all the color.

Speaker 0

Next question comes from the line of Neel Mehta with Goldman Sachs.

Speaker 6

Good afternoon, guys.

Speaker 4

Hey, Neel. Good afternoon.

Speaker 6

Kevin, welcome. Assi, congratulations. Question I had was related to the Elan transaction and just what steps in the process remain to get this across the finish line on July 1? And then I had some follow ups on this topic.

Speaker 2

I think the main step is to basically announce the record date and set up the meeting for the in order for the two shareholders to vote. And we're in a process to get it done in the next few weeks.

Speaker 6

Okay, great. And the target is July 1, right?

Speaker 4

We wouldn't publish a specific day if we weren't confident that this is achievable.

Speaker 6

Thanks, Susie. And the follow-up relates to two different topics as it relates to this transaction. The first is just Cross Springs, Susie, any early thoughts on that asset and different options there? And then the second is just around ALDW. Obviously, ALDW had a very good trading day to day.

Just how you think about what the right strategy is about folding that asset into the company?

Speaker 4

Okay. So let's go one by one. And obviously, I'm taking this my capacity as the Chairman of Alon and in a way, CEO of Delek. So I'll be a little muted on that. But as I told you that as I we told the market in the past, Cross Spring is an asset that will need attention.

Now we don't take the idea of shutting down the refinery very lightly. That's not something that we do very lightly, especially in light of the and you saw Alon's results today, Cold Spring did pretty good in the first quarter without all the help that it needs. It needs attention in three main areas. First, the transportation of the crude, the transportation, not the crude itself. The transportation is very expensive.

Second, the operation itself, including the Alki project, as well as the DHT and the sulfur plant. And the third one is making sure that the netbacks are good from Krotz. Now, we just need to remember one thing and I don't want to read much into it, but and Krotz was designed, this is a light sweet refinery. It was designed to run light sweet barrels. And in today's environment, when we see Mars and Midland at par, it's more let's put it this way, its disadvantage to the crude oil to the Gulf Coast refineries is diminishing because of the price of crude.

It doesn't mean that it doesn't need attention from these three areas, which when we get in, we'll update the market because I think we're developing a detailed plan. And I'll leave it to that, Neil. The second one ALDW. ALDW or Big Spring is a great asset. I'm not surprised obviously with the results that Big Spring is delivering.

We said it all along that once the differentials in West Texas will widen as well as the wholesale margin will increase and we see it in DKL West Texas margins as well. Big Spring will do very well. ALDW, that depends on the yield. And obviously, we showed the market that we have patience. So if it makes sense to our shareholders, we'll look at that.

If it's not, we'll continue with this structure. And we believe that this is a very good asset. I want to be clear though, I don't believe in having four public companies for four refineries. So that will need to change, but as we all said, we waited for two years to complete the alone transaction. We have time and patience and we need to make sure that we create the right value for our shareholders.

And I'll leave it to that, Neil. I hope that wasn't too long.

Speaker 6

That was great. Last question for me, just going back to this RIN stuff in the quarter. Just want to be clear on this. So the waiver that you got, we should treat this as a onetime benefit? Or is there the potential for you to go back to the EPA for additional waivers?

Speaker 4

As we said, we got in the past, I don't remember, it's twenty twelve, twenty thirteen, I believe two years both years we got it. And that's something that we look at it carefully. You can treat it any way you want. I just want to clarify one thing that this is something this is an ongoing process that we evaluate that and we talk to people all the time about this situation. Also, want to clarify one more thing that I think wasn't clear with announcement.

That waiver basically allowed us to sell RINs that we had on as inventory. So I want to make sure that people don't you don't treat this as a non cash event. It's every penny of the $47,500,000 found themselves back as cash to the company. As a matter of fact, some of it will find itself back during the second quarter, because we sold it later after we got the waiver.

Speaker 6

Okay. That's great, Izzy. Thank you.

Speaker 0

Our next question comes from the line of Paul Cheng with Barclays.

Speaker 7

Hey, guys. Good afternoon.

Speaker 4

Mr. Cheng, welcome back.

Speaker 7

Hey. First, Kevin, welcome welcome. And, Arsi, best of luck with your new assignment. Maybe that this is for Arsi. At the end of the first quarter, can you share with us that what is your mean liability on the balance sheet?

Is a negative number or is it a positive number?

Speaker 2

It's very close to zero, the reliability on the balance sheet. But we still have to collect some of the RINs that we sold during the quarter.

Speaker 7

So you still have some cash coming in from the sale of the RIN in the first quarter, but that you're not going to have a lot of RIN to be sold in the second quarter?

Speaker 2

Correct. We had basically a surplus of around $15,000,000 of RIN. And on top of it, we had roughly $20,000,000 of RINs that we sold and haven't collected yet.

Speaker 7

So $12,000,000 you haven't collect?

Speaker 2

20,000,000 two-zero.

Speaker 7

20,000,000 sorry. Okay. And the second one, usually, talk about the 95,000,000 synergy and the 78,000,000, the potential drop down, in the loan asset. How of that $78,000,000 how much of them is actually sitting in ALDW? And also that for the $95,000,000 and also the 78,000,000 can you maybe that give us a little bit little bit more elaboration in terms of into different buckets?

Speaker 4

Yes. Let's start with the synergies. The second one, Assi will give you an answer on the different buckets. We have it in our presentation, but I'll try to recap that I don't have the presentation in front of me. In the 95,000,000 there are four buckets.

The first one, which is basically the most difficult one is the overhead is dealing with people, which is that's the first bucket. That bucket, Pete is kind enough to give me that number. It's between 33,000,000 and $35,000,000 That's basically reducing the cost of public company, reduce the number of people in the overhead and take some other actions. We expect that to happen pretty quickly, that's 33,000,000 to $35,000,000 Then we have around $20,000,000 $19,000,000 $20,000,000 of the cost of capital. That means some of the LCs that Alon uses, refinance of different areas, utilizing the cost of capital of DK that is much lower than Alon.

And we have a detailed plan on that, if you want, Kevin and Arce can expand on that little layer. The third one is operation, that's basically insurance procurement, that's not a big number, it's between 13% to 15 We think actually that that number has the potential to grow. And the last one is commercial, that's between 20,000,000 to $35,000,000 that's the purchasing power that doesn't go to the expenses, but goes to the gross profit, I. E, the premium gathering, the ability to buy other feedstocks cheaper and utilize other assets in a better way. That's the 95,000,000 or 85,000,000 to 105,000,000 number.

And again, it's on our presentation. Assi, if you want to talk about the dropdowns.

Speaker 2

Sure. So on the dropdown, the piece that is part of LDW is the asphalt terminal that we think it's between $9,000,000 to $11,000,000 of annual EBITDA. The Big Spring other assets, mainly the storage, which is 8,000,000 to $10,000,000 of annual EBITDA and the Big Spring wholesale marketing that we estimated to be around $15,000,000 So when you add all those up, it's around 30,000,000 to $33,000,000 of annual EBITDA that we believe we can drop to DKL.

Speaker 7

But the majority of them is actually sitting in the ALDW then, so until that you resolve that, you may have some difficulty to jot it down, I presume?

Speaker 4

I'll let Assi answer that, but I wouldn't assume that. Obviously, you're talking about two different public companies with conflict committees, but it was done in the past within DK. So I'm not sure why you say it's more difficult, I'll see.

Speaker 2

There is no doubt that dropping the other asphalt terminals and some of the things that they have in California makes more sense, and that's what we plan to do in stage one. And then we have two more buckets, which each one of them is around 30,000,000, which is one piece is LDW and one piece is the Cross Springs. So with that being said, as Uzi mentioned, these are two public companies and they all need to look at what's best for their shareholders. And I think that even for LDW, it makes sense to deleveraging the company over time, especially with the fact that LDW is paying over 10% of all in costs as part of their interest costs. So there is benefit for LDW to drop those assets even in this environment.

Speaker 7

Okay. Just curious, I mean, when I'm looking at last year in 2016, alone the refining EBITDA is about $61,000,000 and that if we're looking at DK is about 100,000,000 and so around 160 So from that standpoint, is it is there a concern that if we're indeed dropping the entire 78 or that $68,000,000 if you're excluding the asphalt into the logistics, that ratio may be too much that to be sustained by the company in the maybe that the bottom half of the down cycle?

Speaker 2

So first, when we look at our business in 2016, it was in our mind a unique scenario where we had RINs at the highest cost that we've seen and we already got have most of that money back the following year. We had Midland trading above TI for the full year. And as a result of that, some of that negatively impacted us. In addition to that, when we speak about Cross Springs, which is $30,000,000 out of that $75,000,000 of drop of EBITDA, we will not drop it unless at the same time we'll do some projects to increase the amount of EBITDA for Cross. So if you look, for example, on what Alon announced in the past that, that project, for example, the RK has a $40,000,000 potential return in a year, and that would enable us to do some of what we discussed.

Speaker 7

I'll ask you that do you have a number of what is the DD and A either gross up or reduction once you fully acquire Alon going to look like?

Speaker 2

I refer you to the S-four. We have provided an estimate over there. And right now based on our preliminary estimates, what we have filed, when you combine the both company, the total distribution on an annual base will go down by approximately 65,000,000 Correct, Danny, just to Depreciation. Yes, depreciation will go down by around $65,000,000

Speaker 7

$65,000,000

Speaker 2

On on an the annual base. So if you take the loan depreciation today, plus the direct depreciation today, estimate that the total depreciation will go down by $65,000,000 And if you think about it on a pretax on an after tax base, that can be worth to us around $0.50 a barrel or more.

Speaker 4

A share.

Speaker 2

A share.

Speaker 6

Yes. Thank you.

Speaker 0

Our next question comes from the line of Paul Sankey with Wholesale Wolf Research.

Speaker 8

Hi, everyone. And Kevin, again, welcome and Assi, good luck. I was going to ask Uzi about sort of a normalized EBITDA type question. I'm not sure whether we've just covered that. I guess the point was that Q1 was pretty weak from a cash flow point of view, but there's some noise in there and we've got a lot going on in terms of corporate action.

You've always done a good job in terms of explaining what the normalized cash flow value of Delek would be. I don't know, as I say, we've just covered that, I'm a bit confused quite frankly. But is there something you can add just to make it clear where you see the business in terms of some kind of mid cycle view of the various components? If you feel like you've already answered that, I'll ask you another one, which is could you just talk a bit more about the Permian and how you're doing there and what you see happening there? Thanks.

Speaker 4

Okay, Mr. Thank you. We always are happy to answer your questions regardless if we answer them 50 times before that. The honest answer will be I'm

Speaker 8

not sure if you've already answered it or

Speaker 4

not. Well, we know you are British, so we are willing to you have a really British manner, so we want to welcome that culture. So the truth of the matter is that we didn't answer the first question, so let me answer that one. The second one we did, I'll repeat myself. The first one, normalized EBITDA.

Well, one thing that we need to remember that's very, very, very important is that during the first quarter, we had three big noise in the quarter, even though we reported zero one six dollars that came from the waiver, we had three things that impacted us not so great. The first one Midland was at premium of, I believe, $0.05 0. Since then it turned to a negative of, call it, dollars 1, a little less than that. So in our mind, we're talking about Midland being about $52 normalized under. That's if you take that, that's $2 versus what you see with the first quarter between us and alone, we are processing 70,000,000 barrels, so you're talking about another $150,000,000 The second one that was very messy this quarter is the turnaround in Tyler.

We don't expect to have turnaround every quarter, hopefully, but that impacted Tyler's performance and we need to clean this up. And the third one is that some of the assets we have because of the premium activity, you don't see it immediately, but we see it now already. The West Texas margin, the pay line, the gathering all being impacted by the activity in the premium as well as the RINs. So if we maintain RINs at the level of $0.40 which my personal belief is that it's going to go down from here, but that's just a guess, then you need to add all that into your mall. That's on top of one big thing, which is the synergies, which we feel very comfortable about that.

So I'm sure Keith and Assi will be happy to walk you through the mall after the call, but these are the components that we would like you to consider mid cycle normalized EBITDA. Now, this without mentioning and I'm not planning to mention anything about Crackspread, Crackspread will do whatever Crackspread want to do. But when you see Marks and Midland are the same price, know that you benefit the light barrel versus the heavy barrel. And I'll leave it to that. Yes,

Speaker 8

understood. As I say, the previous questions did go some way to answering parts of that. It feels like the biggest uncertainty looking forward is Krotz Springs probably.

Speaker 4

Well, we answered that as well, but I'll be very brief on that. The idea with Krotz is to look very carefully if we can improve the three components. The cost to bring barrel to the refining, not the cost of the barrel itself, because Krotz can run very comfortably Midland barrel. The problem is that they cost a lot of money to bring it over there and we need to look at that. The second one is the operation itself with because Alon did great job reducing their debt, even the square, but they didn't do a lot about Croats and that will require attention.

And the third one is to make sure that the wholesale and the products are being sold at premium versus the situation today. But what has in situations like today benefit, it runs a sweet bell, it produces a lot of light product and also with RINs being at this price, wholesale is not as bad. And you can see in our loan results that court has done decent, not great, decent under these circumstances, obviously that will as I said, the refining will require a lot of attention. Leave it to that.

Speaker 8

You feel like you've answered I'll go back through the transcript, but I guess you feel like you said what you need to say about the Permian then?

Speaker 4

Yes, I did. And obviously, I'm willing to take it offline with you and give you some education as I see it. I'm sure you know about that as much as I do, if not more.

Speaker 8

We were in Midland and we saw a very nice looking Delek tank. Well,

Speaker 4

shortly you will see a very nice looking refinery.

Speaker 8

Okay. Good. Thanks, Susie.

Speaker 0

And our next question comes from the line of Roger Read with Wells Fargo.

Speaker 9

Good afternoon. How are you all?

Speaker 4

It's a read. I think good evening for you, Noah, not normal.

Speaker 9

Evening, afternoon, we'll roll with it either way. Hey, a couple of questions. One on the demand side, it's been a lot of conjecture that we've got weaker gasoline demand depending on which numbers you pay the most attention to. I know you don't have your retail outlet anymore, but just curious what you were seeing in the home markets there.

Speaker 4

Obviously, we lost our binoculars, if you will. And that's an opportunity for me to wish again, Merco all the best. I do obviously see we do some see wholesale and some sales. I do believe that demand, as I said in the past, is down is it down 3%? Probably not.

Is it down 1%? I believe so. I'm surprised with that. But looks like demand is a little softer. I must say that in our refineries, the four refineries that we see, because we see the alone refineries as well, demand was pretty strong.

But overall, I think the over the along the colonial demand is softer.

Speaker 9

Okay. Thanks. Tier three got talked about a lot latter part of last year, potentially having an impact this year, maybe with gasoline demand a little softer, it hasn't been a big problem and we're just now entering summertime, but just curious if you're seeing any pricing issues in the market or impacts on margins from that?

Speaker 4

I don't know much about it yet. I'm just going to say that I think octane is still a little short and we see the differentials between premium and regular widening a little bit, but I think it's too early to say something about that. And obviously, the people that are subject to this, if you remember, we had the small refinery exemption until 2020. So you probably we don't have as much visibility as the people that have that would need to be in compliance with that. But I do think that based on my knowledge of or our knowledge of our company that there should be some octane hit.

I don't know the magnitude yet. That's probably something that you guys can ask our colleagues and peers. But I can't imagine that there's no octane hit in result to this Tier three.

Speaker 9

Okay, great. And Assi, I'm going to throw one last question at you before you get to be the special projects guy and Kevin will catch you on the next call. But cash flow in the quarter roughly $100,000,000 decline. You talked about the twenty million dollars of RINs that you've sold and you haven't got any cash back yet. I was just curious was there anything else in the quarter in inventory build something that should come back in the next couple of quarters here?

Speaker 2

We did build during the quarter $50,000,000 of accounts receivables, slightly even over that. Some of it is a result of the buy and sell we're doing in Midland and it was even bigger impact on the quarter because of the overall turnaround in Tyler that we didn't get the normalized working capital. So I would say a big part of it should come back over the year.

Speaker 9

Okay, great. Thank you.

Speaker 0

And our next question comes from the line of Edward Westlake with Credit Suisse.

Speaker 10

Congratulations. We're getting closer. A quick question on post close July 1. I mean, what's the communication plan? I mean, there's obviously self help potential at Crocs, but also ALJ has talked about Big Spring.

There's lots of corporate restructuring benefit of disintermediating crude. So just wondering if you're going to do some kind of analyst update on that Q2 call.

Speaker 4

That's once we get it done, our idea is to get together to put our plan together. We obviously we need to put our plan together. We're putting it as we speak. We actually, I think, put it already together, but that will tweak it. And then maybe in the month of July, we'll consider an Analyst Day just to update the market.

We'll I don't want to commit on anything right now, depends on the circumstances. But obviously, there are a lot of questions in regard to the merger that the market won't answer, and we want to be as transparent as we can giving these answers.

Speaker 10

And then as you come up with that plan, do you imagine that there's a room for an ongoing buyback as well as the dividend? I mean, obviously, given the cash on the balance sheet, you have an authorization. But given the merger, I guess, it's been less used than it could be post merger with the synergies coming through and if Permian diffs expand?

Speaker 4

Well, we obviously have that flexibility. What we want to see is, as we said it in the past, that's in the cards. We spoke to our Board on that about that in the last couple of days as they were here. One thing I'd like you to remember, Alone, while did great job reducing debt, have left several projects with good IRR and good return. So the balance will be between the two.

I don't I imagine that we can do both at the same time, depends on the market condition. But honestly, we want to drive value any way we can. So I guess this combination will need to find itself as we finalize our CapEx project in the logistics as well as the alone areas.

Speaker 10

Thanks. I look forward to

Speaker 4

Thank you.

Speaker 0

And our last question comes from the line of Fernando Valley with Citi.

Speaker 11

Hi guys. Good afternoon. I guess I wanted to follow-up on the ALW question. If you were to take it over, would Delek have a vote on an eventual acquisition? How would the actual roll up occur as far as the mechanics of it?

Would it be up to just minorities or would DK also have a vote on it?

Speaker 4

That's a legal question that we will need to focus. I think there are both ways of doing that. We just don't want to take risks that are not needed. So we will look at that situation carefully as the time matures and it gets closer to doing something like that. Obviously, something like that is not feasible between now and closing, so we have time to think about that.

But I do think that both options exist.

Speaker 11

Okay. Fair enough. And then I guess just to follow on the previous question, if you could just at a high level, you think the call on capital once we close the deal is you have enough flexibility to grow both the logistics and duties quicker programs at ALJ. So both Croats and Crocs and Big Spring, the smaller projects and as well as finance growth within DKL, is that correct?

Speaker 4

That's a great question. And that's exactly over the years, you all know that we were blamed to be too conservative. While I'll take the blame, I think it served our company very well that allowed us to make acquisitions during tough times and bring value to our shareholders. We're hoping that the last example is alone. We don't want to take the balance sheet and stretch it.

However, we believe that this situation with Midland will get even better than that will allow us to be very competitive in the marketplace. If this happens, we don't see any reason why we can't do both, especially in light of the fact that the situation at DKL is not tied from a leverage standpoint.

Speaker 11

And so I guess this might be a question more for the DKL part, but it's would you focus primarily on the gathering and transportation side? Or are there other areas of the infrastructure bottlenecks in the Permian where DKL could play as well?

Speaker 4

I think that the areas that we like the most is we said all along that we want to be a Permian company. I think that DKL said the same thing. Actually, no, they did. So I think that the Permian area is a main focus for us. I don't know of any other refinery in the Permian once we get Alon.

So that brings tremendous amount of opportunity. Again, as I said, Alon did great job doing a lot of things. Alon did not gather barrels into the refinery direct, and we believe that that's the first thing and the most natural thing as we hear from producers that we basically need to do so.

Speaker 11

Great. I'll leave it there. Thanks again.

Speaker 4

Thank you.

Speaker 0

And there are no more questions at this time, Mr. Johnson.

Speaker 4

I'd like to thank my colleagues around the room. I'd like to thank the Board of Directors for their confidence in us. I'd like to thank you guys for listening to us and your confidence in our company. But mostly, I'd like to thank our employees for making this company what it is. Have a great day.

Thank you.

Speaker 0

This concludes today's conference call. Thank you for your participation. You may now disconnect.